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Cable likely to be sold on strength

Global focus switches to the US dollar heading into the FOMC meeting minutes later today.

share

IG Analyst

2014-08-20T03:52:00+0100

All trading involves risk. Losses can exceed deposits.

Source: Bloomberg

So far this week we’ve had some encouraging jobs readings and these have really helped to bolster confidence for the greenback.

Heading into the FOMC minutes there is a bit of caution being exercised in the FX space, particularly considering the developments from the last meeting where Philadelphia Fed President Charles Plosser dissented. Additionally, the Fed turned moderately more hawkish on the inflation and unemployment references. As a result, analysts now feel the minutes could reflect an internal dialogue that to some extent reinforces a less accommodative focus.

BoE minutes in focus

Given the significant declines we’ve seen in the pair recently, I will be watching GBP/USD closely. On the UK side of things, a benign CPI reading set the tone for further weakness in the sterling. We’d seen it pick up some ground on Monday on the back of Mark Carney’s comments, but this gave sellers an excuse to short the pair again.

Later today the focus will be on the BoE MPC meeting minutes where the market will be looking for any signs that some members are getting hawkish. While this is unlikely, Mark Carney’s recent remarks seem to have put some doubt in traders’ minds.

Downtrend still intact

From a price action perspective, cable is still stuck below a downtrend resistance line, which has been in place since July when it topped out near 1.7200. The pair is now just shy of 1.6600 – not far off April lows – and is also now firmly below its 200-day moving average.

A small positive is that the RSI suggests the pair is oversold at the moment and is currently trading at 24.6. Should the RSI trade back above 30, this could indicate a change in near-term momentum. Due to the fact the pair appears oversold, I would prefer selling on strength, particularly closer to the 1.6700 mark.

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